For over 20 years I have worked personally with Dave Ramsey, his listeners and team members to help them make important and informed decisions about their insurance needs and the most cost effective ways to address them. Through the years I have responded to over 10,000 of Dave’s listeners regarding their insurance questions.
This blog contains many of the most frequent questions and answers since they provide an excellent resource to Dave's specific advice on very specific insurance questions. I hope you find this information to be a valuable resource that you can refer to many times in the future as you progress along your financial path. Click on the category noted which relates to your question so that you can see the posting currently available. If you do not see your question or still have concerns please don't hesitate to use the "Question Widget" noted on this site for further information or call us toll free at (800) 356-4282.
Many people are surprised that the advice from Dave and I doesn’t always involve the purchase of insurance as the only alternative. Insurance is a key component of any family's financial plan but it can also be a drain and a detriment if the wrong plans are purchased. Implementing the plans and approaches that Dave and I recommend, most importantly, the establishment of an emergency fund, will help reduce a families overall insurance costs and allow them to focus their dollars on more important things such as getting out of debt and growing wealth.
Almost all federal and Veteran’s Association (VA) employees are enrolled in the Federal Employees Retirement System (FERS), regardless of the agency at which they work, and are provided with reduced disability insurance retirement benefits under the FERS. The plan provides 60% income replacement during the first 12 months that disability insurance benefits are paid, and 40% for each year thereafter until reaching early retirement age, at which point the FERS pension begins to be distributed. Most insurance carriers base their offering on a 40% group insurance factor. However, there are some carriers that stop offering coverage once a federal employee has more than 10 years of service or reaches age 50 or 55.
Dave Ramsey does not recommend purchasing “waiver of premium” riders. As a percentage of cost, the rider is an overpriced add-on that makes the insurance company a lot of money and rarely benefits the client. A waiver of premium rider states that you do not have to pay the premium if you become disabled. However, the definition of “disability” is so strict that very few people actually qualify. In addition, term life insurance rates are typically very low and can be funded by your emergency fund if you have short-term income issues, then through your long-term disability insurance if loss of income due to disability continues for a longer period.
Insurance companies typically only require that you be tobacco-free for 12 months before offering a non-tobacco rate. This is not their lowest Preferred Plus rate, but still represents a strong savings as compared to the smoker rates. If you have not gone a full year tobacco-free, it really depends on the time you have left to reach this accomplishment. Dave still recommends buying the longer term period, which is more expensive, but just for the one year. It locks in your rate at a younger age and is still beneficial in the event you do not complete the entire 12-month period. If at 12 months you are tobacco-free, you can apply for a new non-smoker plan and benefit from the lower rates. At the three-year point, you are eligible for the Preferred Plus health class (lowest rate), if you would otherwise qualify for it . Dave’s primary advice is that you get what your family needs now since we can’t predict the future, and then adjust as things improve. You can compare term life insurance rates online or call us toll free at 1-800-356-4282 for personal assistance.
Dave is not totally against annuities, but they should be a low priority in your financial journey. Dave advises against making an annuity type investment while you are still in debt and/or if you have not maxed out other investment options (such as your employer retirement plan and possibly even a Roth IRA, which grows tax-free). If you are at a point where you have paid off debt and have utilized all other more lucrative options, an annuity does offer some tax-deferred growth and can be part of your financial plan. When you reach this point, Dave recommends variable annuities over other type since they allow for investing in stock mutual funds with the tax preferred protection of the annuity. You may want to contact one of Dave’s Investment ELPs to compare options to the plan you are considering.
There has been an increase in the amount of companies offering 7702 private plans. This is a fairly interesting development since there is nothing to legally define a 7702 plan, meaning the use of the term “7702 plan” is arbitrary. It is just another “sales tactic” of agents to sell cash value plans – which are inherently flawed. The 7702 plan is a marketing term used to allow an existing set of insurance products, typically variable life plans, to borrow some of the reputational credibility of an IRA or 401k plan. There is an IRS code 7702, however this section addresses the tax implications of life insurance contracts and does not bestow any additional benefits by naming a plan under this label. It’s just another sales gimmick, and does not change in any manner the fact that they are, in Dave’s words, the payday lender of the middle class. in short, they still have all of their inherent flaws and should be avoided at all costs.
The Suicide/Contestability Clause states that if a person dies during the first two years of their life insurance policy, their beneficiary will not receive the funds of the policy, and the company will refund the premium to the insured’s estate. After an individual has had their policy for two years, this clause no longer applies.
The clause also states that, if an individual dies within the first two years of their policy, the insurance company may verify the accuracy of the information received in the application and/or underwriting process. If any information is found which would have caused the company to decline the application if it had been disclosed, the company may deny the claim and return the premium payment.
Check out more answers to frequently asked term life insurance questions.
You should ask your attorney to have a term life insurance plan as part of your settlement, especially if you will be reliant upon your former spouse for support into the future. The court will create the “need” since you cannot apply for a policy without their participation in the application process. Your soon-to-be ex-spouse will have to complete and sign the application as well as take a brief paramedical exam to determine their own eligibility and cost. If there is a mandate to do this via the divorce decree, you can be assured that they will participate at this level. You will also want to make sure that you are listed as the owner of the policy so that you are the only one that can change the beneficiary designation and are notified in the event that the premium is not paid.
The answer to this question is an emphatic NO! The insurance industry has done an excellent job over the decades creating and reinforcing the concept that you need life insurance for your “whole life” (hence the name of their most popular product). The reality is that you need life insurance only for a period of time during which your family cannot maintain their financial lifestyle due to debt or a lack of savings. By purchasing term life insurance, your rate is locked in for the time period you choose, you are able to free up funds that can be used to pay down debt, establish your emergency fund, and grow your savings. It makes little sense to overpay for a product now (whole life) so you can have protection in later years – when you shouldn’t even need life insurance at that point! Remember – as you are attacking debt and increasing your savings, you are on a path to reducing and eliminating your need for life insurance altogether so that in the future, those funds can be used more effectively through other investment options. There is no financial justification of spending dollars on a product you no longer need just to get a certain rate of return. The expense of the insurance draws away from the true investment value you receive which is poor to begin with. In addition, since your savings and emergency fund should be established by this point, any final expenses or burial costs should be paid from these funds. Learn more about the “Term vs. Cash Value” debate.
There are many elements to the new federal healthcare law, known as the Patient Protection and Affordable Care Act (PPACA). Health plans no longer having maximum lifetime benefit limits or mandatory preventative care services The “individual mandate” that went into effect in 2014 is no longer a federal requirement, though some states uphold this law (MA, NJ, VT, CA, RI, and DC). This requires consumers subject to this law to purchase health insurance which meets a benefit standard set by the federal government or be subject to a tax penalty.
If your employer provides group health insurance benefits, it is likely that your plan will meet the mandate requirement since there are guidelines that employers must follow that are based on benefit design and affordability (or they, too, would be subject to penalties). If your employer does not provide health insurance and you live in a state that upholds the individual mandate, you must purchase a plan and provide proof of coverage to avoid penalties. Your employer is also required, if offering a health plan, to have the employee contribution for single coverage not to exceed 9.5% of their wages or they could be subject to penalties.
Insurance companies can no longer limit, exclude, or deny coverage or charge higher premiums for pre-existing health conditions, expanding your access to plans if you have any such conditions. In addition, PPACA has established subsidies to help individuals and families afford this expense. The subsidies vary by income level and are intended to help within certain poverty level limits reduce their costs to 3-9% of their adjusted gross income.
Visit HealthCare.gov for the most up-to-date information on policy changes and enrollment.
Thankfully, we have only read about this experience and have never had one of the companies we represent go into bankruptcy (or insolvency, which is the term used in the insurance industry). If an insurance company goes bankrupt or is otherwise unable to pay its claims, there is a safety net in each state – known as a guaranty fund – which works similar to the way the FDIC protects deposits in banks. Each state charges insurance companies a tax on their premiums that goes to an insolvency fund that would pay claims up to a certain limit if the company is financially incapable of doing so on their own. The company is then taken over by the Insurance Department of the state in which they are domiciled and goes through a period of rehabilitation. This generally involves the Insurance Department reorganizing the company, and in most cases, finding a new company to buy the assets of the failing company. If the assets being bought do not generate enough to cover the liabilities of the company, the guaranty fund makes up the difference and, in most cases, the insured person is made whole and their policy or claim protection continues. In the event that no buyer is found, the company’s assets are liquidated, and the guaranty fund provides protection up to the state limit for those with a pending claim or outstanding premium. This is a very rare event and the advantage of term insurance is that you do not have a lot of money “invested” in a failing company (like you would with a cash value type plan), and you could simply apply elsewhere. In short – it is definitely an experience to avoid, but having a term life policy greatly minimizes some of the complications.